Risk Management
- Thread starter guru
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you reduce risk by using limit orders.
risk management is the key, if you take 5 of your biggest losses and reduce them from your annual p/l the results are shocking ..
The first thing a forex trader should do, whether he is investing or speculating, is to allocate as much money as he can lose completely and be okay with that. Psychologically, this level is at 10% of monthly income. If you plan to continue to professionally engage in this type of activity, then in no case don't trade with borrowed money taken from relatives, friends or banks. Trading should be treated as carefully as possible, as in this case, making potentially high profits involves significant risk.
And here we approach the basic and quite logical principle: Risk and profit are in direct correlation with each other. In other words, increased risk should bring high profit, and vice versa. The conclusion from this simple principle is also quite obvious: if we take excessive risks in order to earn the same amount (or even less), then such an investment should be rejected.
The next principle that is quite widespread in risk management is diversification of investments. We are talking about the skills of creating a balanced investment portfolio. However, before it is formed, diversification should begin with reducing operational risks. Distribution of available capital between several trading platforms will reduce possible losses due to hacking or closing one of them.
And here we approach the basic and quite logical principle: Risk and profit are in direct correlation with each other. In other words, increased risk should bring high profit, and vice versa. The conclusion from this simple principle is also quite obvious: if we take excessive risks in order to earn the same amount (or even less), then such an investment should be rejected.
The next principle that is quite widespread in risk management is diversification of investments. We are talking about the skills of creating a balanced investment portfolio. However, before it is formed, diversification should begin with reducing operational risks. Distribution of available capital between several trading platforms will reduce possible losses due to hacking or closing one of them.
When trading on the market, you need to know at least about the basics of risk management, but it is better to understand it professionally, because the main attribute of any deals made in the financial markets is risk. Without competent, professional management, without risk management in such markets, it is impossible to stay in for a long time. To be a successful trader, you should learn how to evaluate risks, balance and reduce them. Only in this case the capital won't only be saved, but also multiplied. Personally, I've 2 main rules, which I always try to follow:
-You shouldn't invest more than half of all capital in even the most tempting project. Among financial experts this principle is also called ""diversification"". That is, in order to successfully continue your activities in the market, it is best not to invest all the money in just one deal. More than half of the money should be left for other projects to continue your work.
Some economists recommend investing at least 50% and less than 5-30%, depending on the risks that accompany the transaction.
-Place a stop loss. If there are no large losses, if price changes are not in your favor, it is best to take care of it in advance and set the stop loss. It makes the price fixed, which will allow the trader to close the position: the position is closed if there is both an overpriced and a too low price. How the stop loss is set is influenced by market analysis, as well as the personal readiness and ability of the trader to make dangerous, risky, but profitable deals.
-You shouldn't invest more than half of all capital in even the most tempting project. Among financial experts this principle is also called ""diversification"". That is, in order to successfully continue your activities in the market, it is best not to invest all the money in just one deal. More than half of the money should be left for other projects to continue your work.
Some economists recommend investing at least 50% and less than 5-30%, depending on the risks that accompany the transaction.
-Place a stop loss. If there are no large losses, if price changes are not in your favor, it is best to take care of it in advance and set the stop loss. It makes the price fixed, which will allow the trader to close the position: the position is closed if there is both an overpriced and a too low price. How the stop loss is set is influenced by market analysis, as well as the personal readiness and ability of the trader to make dangerous, risky, but profitable deals.